Inside: Museveni chases oil Investors out of meeting after heated and verbal exchange

Uganda’s oil sector has been thrown into another toss up after President Yoweri Museveni cancelled a highly anticipated meeting on June 05 between him and oil production company executives; Eyalama newspaper can exclusively report.

The meeting was to be a follow up of one on April 29 that went badly as the oil executives attempted to squeeze a breakthrough from Museveni but he left them empty handed and, according to highly placed sources, pushed hopes of Uganda’s first oil further.

Museveni’s cancellation sinks any hope of early or easy resolution of disagreements. According to insiders, it shows Museveni is still seething from the outcome of the April 29 meeting.

At the meeting, the oil executives wanted Museveni to direct URA on what to do, to resolve a tax dispute. But Museveni reportedly insisted the oil firms had to go and resolve the issue with URA not him. At that point, one of the oil executives reportedly bluntly told Museveni that, in that case, there would be no movement.

By no movement, the oil executive meant the company would freeze its activities in Uganda. It appears this did not go well with Museveni and the meeting reportedly ended prematurely.

At the centre of the disagreement between Museveni and the oil companies are several issues including; new regulations for midstream activities that include processing, storing, marketing, and transport the oil.

There are potentially lucrative deals in this sector, which the oil companies are anxious to retain but the government insists it must be a player. The other point of disagreement is over recoverable tax costs that the oil companies are claiming, and Capital Gains Tax (CGT) that the government wants.

Initially, the CGT dispute was over a US$167 million (Approx. Shs625 billion) bill that the Uganda Revenue Authority (URA) slapped on Tullow for its sale announced in January 2017 of US$ 900 worth of assets to Total E&P and the Chinese oil firm CNOOC. Tullow had refused any of it insisting given the costs it had incurred, the cost didn’t arise—sparking a stalemate.

But since Total and CNOOC want to move on to the next stage; the Final Investment Decision (FID) into production with even bigger money at stake, they offered to clear the US$82 million in dispute and got Tullow to offer the remaining $ 85 million.

However, they also offered tough conditions, which URA has refused to accept and it appears Museveni has now also rejected.

The June 05 was seen as an opportunity to push the past behind and move on.

Museveni instead fired off a letter to Total E&P, the oil giant leading negotiations on the side of the oil companies, indicating that he rejected all their demands and, therefore, there was no point of meeting. By presstime, it wasn’t clear how the negotiations would move forward.

Total Managing Director

President Museveni has remained overly cautious at every point in the journey towards Uganda becoming an oil producing. This could be partly because of lessons learned from elsewhere—where poor decision making around oil extraction has hurt more than developed economies. He is also surrounded by technocrats who appear keen to squeeze out the best deal for the country.

The hardball stance has strong backers; especially at the Petroleum Authority of Uganda (PAU), the Ministry of Energy, and taxman, URA.

But it frustrates oil companies which are equally looking for the best deal, and the Uganda National Oil Company (UNOC), who partly owing to their business approach, want the government to get the oil cash now and invest it in other ventures to make even more money.

Indeed, when the UNOC boss, Josephine Wapakabulo, announced early May that she would quit the job within three months, some cited frustrations surrounding delayed decision-making.

Pro-business experts warn that Uganda is also discouraging future investors with its decision gridlock. Indeed, the last time the country put up fresh oil blocks for exploration in 2016, it only attracted small and in some cases dubious companies. Some pessimists insist more exploration blocks offered last year could equally suffer.

Uganda first discovered commercially viable quantities of oil—now totaling 6.5 billion barrels with over one billion of these recoverable—in 2006 but delays in establishing the necessary laws and institutions, erecting the requisite infrastructure, disagreement over route to production, and major tax wrangles have delayed the start of production for 13 years now.

The government’s failure to resolve disputes quickly delays the FID by oil companies. This in turn delays everything else—the oil pipeline through Tanzania, the refinery, and all the critical works on the oil fields.

Last year, the hope was that the investors would reach FID in the first quarter of this year. But going by what is happening, it will take a miracle to reach FID this year. That is why Museveni’s cancelling this crucial meeting is a major setback. 

A 2017 internal study commissioned by local office of the UK Charity, Oxfam, titled Securing a Fair Share of Ugandan Oil Revenues: A Revenue Risk Assessment Focused on TOTAL SA concluded that while Uganda has already demonstrated a strong commitment to protect its revenue interests during the exploration phase, mega risks lay ahead. Uganda won the Capital Gains Tax dispute with Heritage, the stamp tax dispute with TOTAL. It has also reviewed Double Tax Agreements, and its Office of the Auditor General has done recovery cost audits.

But the money in the next phase, the development phase, the study noted, will dwarf those of the exploration phase.

Oxfam, which is headed by Winnie Byanyima; a Ugandan, did not stop at commissioning this study—it shared findings with Museveni and his army of technocrats at Finance, Energy and even URA, insiders say. A source who attended one such meeting at State House Entebbe said the President couldn’t stop taking notes.

“Many hundreds of millions of dollars are at stake,” an Oxfam study noted, adding that Uganda faces major revenue loss risks through treaty shopping, the mispricing of oil sales, the inflation of project costs and potential profit shifting to the pipeline. And it appears officials are keen to limit these potential leaks.

President Museveni firmly belongs in the camp that plays hardball in negotiations. And the situation is not helped by the lead negotiator for the oil executives, Patrick Pouyanne, the Total SA chief executive. Pouyanne has built his executive management reputation around one issue; cutting costs.

Within Total, Pouyanne has built his career partly by cutting costs.

Since he took over in 2014, Pouyanne has elevated the company’s financial performance, partly through cost cutting. Given this, Pouyanne is not likely to be any softer on any of these issues that rotate around costs of the oil projects.

Total E&P, has already sued over order a government order (statutory instrument) seeking to control key decisions on midstream activities; including over the $ 3.55 billion East African Crude Oil Pipeline (EACOP). Total E&P is the main investor in the pipeline.

Total E&P sees these new rules as regulatory overreach partly because they grant government more control on the costs of midstream infrastructure, specifically, in the case of the French oil giant, the costs of the pipeline.

However, the Midstream Act empowers government to approve the pipeline tariff (now set about $ 12.7 per barrel of oil) and Museveni’s technocrat see this as a basis to have a say on the investment costs of the EACOP. Apart from this, experts say since government will own a stake in the pipeline, it has fair ground to claim a say on the costs as these have a bearing on the commercial viability of the project. That fight is still raging. Insiders say negotiations could soon resolve it.

Fight over taxes

But at another level, government and oil companies are involved in hot exchange over three tax issues.

One, government insists Total E&P cannot deduct tax costs worth over $600 million arising from the Tullow oil farmout deal. The URA and officials at the Energy Ministry cite the tax laws to insist that Tullow Oil had already booked the same as losses and as such these cannot be transferred.

Apparently, according to the law, these losses can only be inherited if the buying company is buying shares. Total and CNOOC are not buying shares—they are buying assets. The companies are also insisting that they are incurring these costs and therefore, they should be treated as tax losses the same way they were treated under Tullow.

Two, government insists the companies should pay income tax on first oil, meaning immediately oil starts flowing. This stems from a 2017 amendment of Income Tax Act. As a result of this amendment, government demands that oil companies pay income tax immediately oil starts flowing. Ordinarily, income taxes are imposed on profits, experts say. According to Production Sharing Agreements (PSAs), oil companies are supposed to start paying such taxes after recovering their costs, which according to some estimates could be in like six years of steady oil production.

Experts say that companies in other sectors are allowed a full deduction of their business costs in determining their income tax liability. They argue that denying oil companies full deduction of their annual business expenses, as government seeks to do, is contrary to normal principles of income taxation.

Three, the government wants the pipeline holding company, the Special Purpose Vehicle (SPV) for the pipeline, which will be registered in the UK to be a tax resident in Uganda, where it will have to pay taxes on its operations.

On top of this, government wants the same company to pay withholding tax (15 %) on dividends before they are paid to the UK Company.  The companies are saying no.

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This is all part of on-going negotiations for the Host Government Agreements (HGA). The oil companies have to enter HGAs with both Uganda and Tanzania, where the biggest portion of the pipeline passes all the way to the coast in Tanga. The agreements spell out obligations of the two governments and the oil companies, amongst others.

Insiders tell Eyalama newspaper that the matters before court case could be resolved soon. But the tax issues could drag on because they are many and have long term impact.

Details of main dispute

The main disagreements, which needs to be resolved with the oil companies stems from Total E&P and CNOOC’s purchase of majority of Tullow’s stake in Uganda’s oil fields.

The trio control 100% of Uganda’s oil fields currently under development; initially with 33% each for Tullow, CNOOC, and Total.

Tullow’s share was cut in January 2017 when it offered 21.57 % of its share for sale. Initially, the deal was to sale to Total E&P; however, CNOOC insisted on its rights and they shared the Tullow offer 50/50. That left Tullow with 11% of the oil fields.

At this stage, however, another challenge appeared. Since Tullow would stop operating its assets; the question arose around who would operate these assets.

This became contentious because, since Tullow first negotiated with it, Total E&P had already integrated these assets into its bigger project also known as Tilenga.

But CNOOC again insisted on its rights until President Museveni intervened and offered CNOOC another deal—an exploration block. That got them to surrender the operatorship to Total E&P. Then the dispute over a $ 167 million tax bill emerged. This too appeared resolved in January.

Insiders say both government and the oil companies were in the midst of concluding documentation on how this $ 82 million (exgratia pay) would be treated when yet another huddle emerged.

The oil companies want to inherit Tullow oil’s recoverable costs. Most importantly, this means that if Total and CNOOC start making income, they would not be charged tax until all these costs are deducted. The government has refused this position.

Museveni brings optimism

As the negotiation, posturing, and court cases rage, President Museveni and executives of oil companies are keeping their cards close to their chests. But industry observers are reading into anything they can find to give a sense of the direction of things.

So when on June 6 while reading the state of the nation address President Museveni said the commencement of oil and gas production and work on the oil pipeline and the refinery “will be starting soon”, it was seen as a hint of optimism.

The President also said that work on three key oil roads– Karugutu-Ntoroko and Kabwoya-Buhuka (98km), Masindi-Biso; Hohwa-Nyarongwa-Kyarusheshe-Butore and Kabale-Kiziramfumbi, and Lusalira-Nkonge (97km), would commence in the new financial year.

Stakes are high. Uganda’s ability to dig itself out of the current debt hole and guarantee future economic growth prospects have been pegged on activating oil investments by the World Bank, International Monitory Fund (IMF) and the officials at the Finance Ministry.

Indeed in the state of the nation address, President Museveni cited the commencement of oil as part of the basis for the country’s “very positive” economic growth outlook.

Despite economic growth picking up from 4.5% in 2016 to 6% since last year, it can only be sustained and possibly improved by the expected dividend from oil related investments; in infrastructure projects like oil roads, pipelines, refinery, and other oil processing facilities. This could gradually bring in some estimated $ 20 billion (Approx. Shs75 trillion).

While the oil companies will be the spenders, they also stand to make a big chunk of their money in this phase as some of the work will be subcontracted to their sister companies. Continued delays, therefore, hurt both these companies and the country.

Heated Meeting

Tullow Uganda CEO Jimmy Mugerwa discussing with MTN Uganda Chairman Charles Mbire

President Yoweri Museveni remains uunhappy with the executives of Tullow Oil Uganda after it emerged they had been peddling lies about the taxes government expects to get from the company’s farm down process.

Sources say Museveni chased Tullow Uganda CEO Jimmy Mugerwa and other company executives out of the meeting after discovering the lies that have caused the process to delay. Tullow Oil is yet to seal a capital gains tax deal in which is needed for the progress of the deal where the company wants to sell its stake in Exploration Areas 1, 1A, 2 and 3A to Total E&P.

Sources say the executives at Tullow Uganda don’t want government to get a fair share of revenue out of the transaction in which the company hopes to earn Shs3.3 trillion (US $900m). But their selfish actions have not gone well Museveni who wants the government to get a fair revenue out of the deal.

Government of Uganda and the JV Partners have been engaging in discussions to finalise an agreement reflecting the tax that will enable completion of the farm-down to take place. “Any capital gains tax is expected to be phased and partly linked to project progress.

In April Tullow Oil said the Uganda talks were expected to conclude but the process still goes and progress is also slower than expected. A tax deal needed to close the US $900 million (about Shs3.3 trillion) sale of a stake in its Ugandan fields to Total is pending and sources say Museveni is not happy at all.

“We continue to work constructively with our Joint Venture Partners and the government of Uganda to agree a way forward and the consequent timing of FID. Nevertheless, although negotiations continue, Tullow is currently considering all options in pursuing the sale of its interests in Uganda,” it said Tullow Oil days ago.

Barclays, one of the arrangers of the deal recently said the likelihood of a final decision on Uganda to come in as planned this year was declining.

“Tullow’s comment… indicates the potential for a fresh approach/structure to the deal that can be acceptable to all stakeholders, but increases uncertainty around the timing of the development,” said Barclays.

Tullow Oil in January 2017 announced plans to farm down its interest in Uganda’s Albertine Oil Project to Total for US$900 million.

Tullow Oil said in a statement issued then, “A Sale and Purchase Agreement with an effective date of 1 January 2017 has been signed in which Tullow has agreed to transfer 21.57 per cent of its 33.33 per cent interests in Exploration Areas 1, 1A, 2 and 3A in Uganda to Total for a total consideration of $900 million.”

Tullow, Total and China’s CNOOC have hitherto all had equal stake of 33.3 per cent of the three exploration areas of Uganda’s Albertine Oil Project. It will be remembered that in line with the terms of its exploration MoU with the Government of Uganda, in March 2011, Tullow sold two-thirds of its exploration interest- one third each to Total and CNOOC at a combined value of US $2.9 billion.

The sale of the 21.57 per cent of share means that Tullow still retains an 11.76 per cent interest in the upstream and pipeline, which is expected to reduce to 10 per cent when the Government of Uganda formally exercises its right to back-in. Tullow intends to have a non-operated interest in the venture, that is, it will not have a management role.
Total on the other hand with a new accumulated 54.6 per cent shareholding will take the role of lead

Tullow Oil Plc expects a cash payment of US $100 million on its farm-down to CNOOC and Total, according to Paul McDade, Chief executive officer who presented the company’s financials for the year 2018.

At completion of the farm-down, Tullow also anticipates to receive a payment of the working capital completion adjustment and deferred consideration for the pre-completion period of US $108 million.

A further US $50 million of cash consideration is due to be received when the final investment decision (FID) is taken on the development project. “The JV Partners continue to work towards reaching FID for the development project around mid-2019. During 2018, the upstream and pipeline FEED were completed in preparation for the award of Engineering, Procurement and Construction (EPC) contracts in 2019,” he said.

 

 

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